Jackson County Senior Services is a nonprofit organization devoted to providing
ID: 2582990 • Letter: J
Question
Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:
The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.
The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.
1. What is the impact on net operating income by discontinuing housekeeping program?
B)
Should the housekeeping program be discontinued?
2.
*Allocated on the basis of program revenues.Explanation / Answer
No, the housekeeping program should not be discontinued.
Computations to support this answer follow:
Contribution margin lost if the housekeeping program are discounted $(80,000)
Less fixed costs that can be avoided: Liability insurance $15,000
Program administrators' salaries 37,000
Decrease in net operating income $(28,000)
The depreciation is a sunk cost, and therefore it is not relevant to the decision.
The general administrative overhead is allocated and will presumably continue regardless of whether or not the housekeeping program are discontinued; thus, it is not relevant
If management wants a clearer picture of the profitability of the segments, the general administrative overhead should not be allocated.
It is a common cost and therefore should be deducted from the total service segment margin
Total Home Nursing Meals on Wheels House-keeping
Revenues $900,000 260,000 400,000 240,000
variable expenses: 490,000 120,000 210,000 160,000
Contribution margin 410,000 140,000 190,000 80,000
Fixed expenses:
Depreciation 68,000 8,000 40,000 20,000
Liability insurance 42,000 20,000 7,000 15,000
Program administrators' salaries 115,000 40,000 38,000 37,000
Service segment margin 185,000 72,000 105,000 8,000
Common fixed expenses
180,000 Net operating income (loss) $5,000
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